Put pressure on those bleeding costs
BY TOM BISSONNETTE
Back in 1986, I worked at Parr Auto Body as the shop manager. I was in way over my head—a 2,230 sq. m. (24,000 sq. ft.) facility with a rent cost of $12,000 a month was just one of the insane overheads that the business had.
I worked six days a week, 10 to 12 hours a day to keep the place solvent. Even so, as a 30-year-old with just four years of experience in the autobody business, things did not look good.
I was fortunate enough to have the sense to do two things.
First, I reached out to our paint supplier— Reineking Paint—for help and they introduced me to the guys at Regina Auto Body. Chris, Greg and Mike have been mentors and friends from that day forward. I’ve learned so much from them and cannot thank them enough for their guidance.
On Chris Mario’s advice I flew to Vancouver in the fall of 1986 to attend a body shop management workshop, sponsored by 3M, called ARMS, or Auto Repair Management Seminars.
The 3M ARMS event was a turning point for our business. Up until that time I was trying to overcome the challenge of running that shop with sheer energy and hard work. The folks at that event were the first people that ever told me about the numbers of the business. I had no idea up until that point that there was a formula for financial success in the body shop business.
They explained that there are targets to hit in the four main income areas of a body shop and, if you added them all together, you would find that after you paid all of your production costs—labor, parts, materials and sublet—you should have about 40 percent of your sales leftover to pay fixed costs like rent, taxes office staff etc.
It was clear that you did not want your fixed or operating costs to exceed 30 percent of your sales, thus leaving you a tidy little profit of roughly 10 percent.
I went back to the shop and started doing the math. We were averaging about 33 percent gross profit overall instead of 40 percent, and our overhead was 35 percent of sales. No wonder we were bleeding to death! So where do you stop the bleeding?
The first thing I did was start job costing each and every job. I tracked our sales and cost of sales on each and every job. This can seem like an enormous project, but it can be done manually. The easiest way to do it is to have a shop management system and actually use it, then let the computer do that work. If you do not have a shop management system you can do it manually using the aforementioned Job Costing Template.
To track employees’ time, I asked everyone to document how much time they spent on each job every day. If they were not working on a paying job, they had to write down what work they were doing; maintenance, estimating cleaning the shop etc.
It was clear that you did not want your fixed or operating costs to exceed 30 percent of your sales, thus leaving you a tidy little profit of roughly 10 percent.
Example:
Sales $100,000
Cost of Sales -$60,000
Gross Profit $40,000
Overhead -$30,000
Net Profit $10,000
It comes down to two options; if you are happy with the way things are going, don’t change a thing. If you are not happy with the profitability of your business, you need to either start learning or hire someone to help you manage your financial situation.
I unveiled many underlying issues by doing this. Some of our employees were not overly efficient and we made nowhere near 60 percent gross profit on their work. I helped them find new careers.
As a major part of your income, your parts department deserves to have a specific person in charge of ordering, receiving and job costing them. In the beginning, some of our parts suppliers were not giving us a decent parts discount, so I found other suppliers that did. Some of our parts suppliers were not giving us credit for returned parts, so I no longer dealt with them.
Using parts from SGI salvage is an incredible way to increase your gross profit on parts, since you can bill SGI 60 percent of the new price. Aftermarket parts can give you anywhere from 30 percent to 40 percent margins as well. In some cases, you need to talk to your vendors and find out if you are getting the best discount possible.
We were doing wholesale work for some dealerships near us, where the average gross profit was close to 30 percent—less than my overhead costs! We saw the same thing with restoration or rust jobs, and I simply discovered that you cannot make any money on those jobs while trying to run a collision business. If you want to do that type of work, open a restoration shop in another location. We promptly quit doing jobs for no profit. To do this, you have to have data, otherwise you are simply guessing.
The second step I took was to look at our overhead costs. Twelve thousand in rent is a lot of money in today’s dollars—in 1986, it was huge. So, I simply told the landlord that we could not afford to pay $12,000 a month, and they immediately dropped the rent by a significant amount.
Parr eventually moved to its current location, where the mortgage was less than half of what was previously paid in rent. We cut some staff, dropped some courtesy cars, and it worked great for a while—until every other shop adopted the practice then the strategy remained as an albatross on the necks of all Saskatoon body shops.
When it comes to paint and materials, there is plenty of room to manage costs. I find it better if only one person orders these materials; when multiple people do it you will generally see duplication of materials. One body man likes a certain sandpaper, and the next guy likes something else.
Bulk buying is another strategy I’ve used with shop supplies. Some operators order on an as-needed basis saying, “why tie up that money in material?” I figured that if I could buy a year’s supply and get an extra 20 percent discount, I was ahead of the game. Are any of you making 20 percent on your cash at your bank?
It comes down to two options; if you are happy with the way things are going, don’t change a thing. If you are not happy with the profitability of your business, you need to either start learning or hire someone to help you manage your financial situation. Business today is tough—even tougher if you are not making any money! Feel free to call or email me if you want or need advice. I have literally done everything wrong at one time or another and I can tell you how to avoid my mistakes.
